Friday, June 26, 2009

KKR

KKR has been rumored to be going public on the NYSE. The key to the deal would be to de-list its public entity in the Netherlands and merge it with the main operations of KKR. The Deal Book of the New York Times has this to say about the deal (note the thinking methodology on value and valuation):

K.K.R. Plans Are Returning to Earth, and Amsterdam

June 26, 2009, 4:41 AM

A tough year seems to have brought reality home to the buyout barons at Kohlberg Kravis Roberts, Breakingviews says. The firm’s latest step toward a full stock market listing looks more practical than last year’s overambitious plan, the publication says.

In July, K.K.R., the private equity firm, wanted to buy and delist its Amsterdam-listed investment vehicle, KKR Private Equity Investors, also known as K.P.E. Shortly afterward, it intended to list the enlarged K.K.R. on the New York Stock Exchange. But the deal seemed too complicated even before the market turmoil.

The equity firm’s aspirations on its own value also looked like a stretch, Breakingviews says. Last year, K.K.R. hinted at a market cap in its predeal form of up to $15 billion, when about two-thirds that size seemed more reasonable, the publication suggests.

Now, everything appears to fit a little better, according to Breakingviews. K.P.E.’s shares trade at around $6 apiece, for a market cap of $1.2 billion. They have risen lately, but being closely held and not very liquid, they probably do not reflect the full value of K.K.R.’s offer, the publication says.

The underlying net asset value of KKR Private Equity Investors’ holdings is $2.6 billion. Split the difference, and the 30 percent of K.K.R. that K.P.E. will get could be worth around $1.9 billion, Breakingviews calculates.

That means the other 70 percent — essentially, K.K.R. — would be worth about $4.5 billion, it says. The second stage of K.K.R.’s plan, a New York listing of the enlarged firm next year, could raise that valuation somewhat.

Consider Blackstone, a publicly traded rival. Like K.K.R., Breakingviews says, it lost money last year. But Blackstone’s stock trades at about 10 times the five-year average of its “economic net income,” an adjusted measure of pretax profit. Apply the same multiple to the five-year average of K.K.R.’s economic net income, and it would be worth about $5.2 billion, the publication suggests.

Investors sometimes use other measures to value fund managers. Blackstone’s market cap as a percentage of its $92 billion of assets under management is around 14 percent. Using that figure, K.K.R.’s $47 billion of assets — admittedly, a different mix than Blackstone’s — would be worth $6.6 billion, Breakingviews says.

Based on these metrics, a publicly traded version of K.K.R. might be valued from $5 billion to $7 billion, according to the publication. K.K.R. thought it was worth more than twice that last year. So if they’re determined to go public, Breakingviews says, even masters of the universe must inch closer to earth.

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I have been at the intersection of IT, Finance and the Pacific Rim for the past 20 years in banking, venture capital, private equity and academia. My recent interests are in the application of technology, especially the internet, in emerging markets.